Saturday, October 13, 2012

Forcing Policy Changes in India: Strength of supply chain effectiveness of the Walmarts and Carrefours

Opening of ceremony of a newly opened Bharti Wal-Mart store in Hyderabad in 2010

The Indian government recently passed an executive order permitting up to 51% FDI in multi-brand retail and 100% investment in single-brand retail. It was a bold step considering the resistance it had to face from opposition parties and from within its own allies who were concerned about potential death of the local kirana stores. While not getting into the politics behind it, I want to talk about the technical and policy reasons behind the government’s decision. The primary driver behind the legislation has been the currently inefficient supply chain of food (fruits, vegetables, crops etc.) in India.

A typical Kirana store

The government bases its side of the story on three key changes that they think this new policy would bring:
1.       Better prices for farmers
2.       Lesser wastage of food
3.       Lower prices for the consumers
Currently, farmers sell their produce at government owned wholesale vegetable markets. It then goes to local vegetable markets from where it gets picked up by various vegetable sellers and kirana store owners. Because there are so many middlemen involved in the whole process, a very little amount of what the customer pays actually goes to the farmer. Most of it is shared by the politically strong and influential middlemen. This means that the farmer is not only inadequately compensated, he is left at the mercy of the prices decided at the wholesale vegetable markets. Of course, all this is not so simple but gives a rough picture of current state of affairs. Government estimates that entry of Walmarts et al would lead to them negotiating directly with the farmers. This would lead to better prices for the farmers and lower prices for the consumers.

A traditional wholesale food market in Guwahati, India

A fruits seller in New Delhi, India

India has an archaic supply chain for crops. In 2010, government reported an estimated loss of 250,000 – 1 million tons of food grain loss due to inefficient warehouses and storage. The situation is worse for fruits and vegetables. India has one of the most inadequate cold chains which lead to huge losses. A KPMG report puts the losses from farm to fork anywhere between 30 – 40%. Although India is the world’s second largest fruit and vegetable producer (134.5 million tons), cold storage facilities are available only for 10% of the produce. The government was traditionally the only player in the warehousing, distribution and storage market but it is evident now that it has not been doing its job well at all. Also, the investment and management expertise needed to run these areas are absent. It estimates that having modern supply chains would lead to a drastic lesser wastage of food.

This is where the strength of supply chains of the Walmarts and the Carrefours come in. The government predicts that if these giants have to perform well and make positive RoIs in India, they’d have to invest heavily in the supply chains. This is where they’ll make use of their expertise in management and their deep pockets. Of course, it has left the doors open for Public-Private Partnerships.  The government also predicts that apart from modernizing the supply chains, these companies would need to have lower prices for the consumers if they have to survive in the competitive Indian market. With so many difficulties against it, why would the retail giants want to do it? Simple answer:  Indian retail market is estimated US$450 bn (top five in the world), and more significantly, one of the fastest growing in the world.

Not only food but companies like IKEA and Apple have shown significant interest in entering the Indian market. I’ll end up with one question that has kept bothering me for some time now and I’d love to hear your opinion on:

For the end-customer, do you think the prices would be lower as the government predicts or will the creation and handling of the modern supply chain mean that the prices may finally end up increasing?

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